If the federal government wants to score points with seniors, it will eliminate or roll back the requirement to make a minimum annual withdrawal from registered retirement income funds.
Eliminating the need to withdraw money from a RRIF each year would give seniors more flexibility in managing their retirement savings over increasingly long lifespans. But mandatory RRIF withdrawals aren’t as onerous as they’re sometimes made out to be. In no way do they force seniors to deplete their savings in a way that could cause them to run out of money.
The C.D. Howe Institute recently described mandatory RRIF withdrawal requirements as being stuck in the past, and urged they be eliminated or relaxed. A collection of groups have urged the federal government to raise the age at which registered retirement savings plans must be converted into RRIFs, and reduce the required minimum withdrawal.
RRSPs must be converted to RRIFs by the end of the year you turn 71, at which point a rigid schedule of gradually increasing annual withdrawals must be followed. Mandatory RRIF withdrawals are intrusive, but manageable in a way that preserves your savings.
For example, you could make a cash withdrawal from a RRIF and then contribute the money to a tax-free savings account. The amount withdrawn from the RRIF is taxable, but using a TFSA means all future investment gains are tax-free.
Another option is to meet your obligation to make an RRIF withdrawal using an in-kind withdrawal, where you move shares or units in a mutual fund or exchange-traded fund into a taxable non-registered account.
The point here is that withdrawing from a RRIF does not automatically mean you are depleting your retirement savings. You have the option to remove money or assets from a RRIF and save or invest them elsewhere.
Tax must be paid on RRIF withdrawals of any type, but that’s the point. The federal government gave you a tax break on contributions to your RRSP, and it wants to gradually recover that money from your RRIF to help pay costs like health care and Old Age Security.
Mandatory RRIF withdrawals hit the news every time the stock market crashes. Seniors worry about having to cash in hard-hit investment to make their RRIF withdrawal, but that’s an entirely avoidable problem. Just keep two or three years’ worth of mandatory withdrawals in cash vehicles or other safe investments. Dip into this money instead of selling a wounded stock or fund.
Finally, here’s a chart that shows how money in a RRIF may last longer than you think, even as you make annual required withdrawals.
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Rob’s personal finance reading list
So much for cheap food
You’ll have to choke this one down. Apparently, we were living in an era of cheap food before the pandemic and the big rise in inflation. That’s done, says Sylvain Charlebois, senior director of the agri-food analytics lab and a professor in food distribution and policy at Dalhousie University.
Can this single woman retire at 55?
An investing blogger works through the question of whether a 45-year-old woman with a mortgage can retire in 10 years.
Seven myths about credit scores
The high level of engagement people have with their credit score is one of the more striking changes in personal finance in the past 15 years. This makes sense – credit scores help determine your cost of borrowing, and they can be checked by prospective landlords and employers. Here’s a useful look at some of the misinformation floating around about credit scores.
Mind your belongings
A list of the items most often left behind in an Uber in Ottawa. Phones, wallets, laptops and other expensive things you don’t want to lose.
Ask Rob
Q: Would it be more beneficial to cash out of a registered retirement income fund at today’s tax rates as the rates are likely to go up over the next few years?
A: It’s a guess that taxes are going up – not sure that’s a strong basis for making long-term financial plans. And if taxes do go up, would that not affect the money you pull out of a RRIF and invest in a non-registered account? Tax-free savings accounts could be a home for some of the money coming out of a RRIF, but contribution room is limited. Don’t discount the benefit of tax-free compounding in a RRIF.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
Everything you need to know about credit scores.
The money-free zone
Add this to the vast list of great Neil Young covers – Hey Hey My My, by Oasis.
Watch this
The FHSA is here: How to make the most of this new homebuyer incentive
From the Twitterverse
A financial planner on why he doesn’t buy a rule of retirement that says you can withdraw 4 per cent of your savings each year, adjusted for inflation, without fear of running out of money.
ICYMI
What I’ve been writing about
– This is how much you should plan to spend on dental and medical costs in retirement
– If you think the CPP survivor’s benefit is bad, check out the death benefit
– 2023 Globe and Mail ETF Buyer’s Guide Part Six: Asset allocation funds
More Rob Carrick and money coverage
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